Italy election wake-up call for euro zone

ITALY headed for gridlock and financial markets tumbled as a stalemate developed in Parliament between the right and left after critical elections in which the real winner might be a new protest party calling for a referendum on the euro.

Democratic Party leader Pier Luigi Bersani and his leftist coalition scraped a razor-thin victory in the lower chamber of Parliament. They won just 29.55 per cent to 29.18 per cent for Silvio Berlusconi, with 99.9 per cent of the ballots counted.

The victor's bonus will give the left a handy majority in the lower house, the Chamber of Deputies.

A rising star in Italian politics, former comedian Beppe Grillo leaves after casting his vote at a polling station in Genoa. Photo: Reuters

But in the 305-seat Senate, preliminary results showed Berlusconi's coalition could win 110 seats to the left's 97 seats, with neither group having a majority.

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A majority in both chambers of Parliament is required to form a government, leaving Italy in a state of limbo with a hung Parliament, unprecedented in its postwar history.

''It is clear to everyone that this is a very delicate situation for the country,'' Mr Bersani said late on Monday.

US stocks closed sharply lower with the Dow Jones Industrial Average down 1.55 per cent on the news and stocks in Tokyo opened 1.83 per cent lower.

''Political uncertainty has returned,'' SMBC Nikko Securities general manager of equities Hiroichi Nishi said at the start of trading on Tuesday.

The newcomer Five Star Movement led by former comedian turned activist Beppe Grillo, who has stirred anger at politicians and budget cuts, became the country's third political force, creating dozens of new MPs.

Mr Grillo's movement is calling for a referendum on the euro and a 20-hour working week, as well as environmental and social rights demands.

Comparing single parties without coalitions, the M5S is now the biggest party in the lower house with 25.55 per cent to the Democratic Party's 25.41 per cent, a shock success that analysts predicted would reverberate around an austerity-weary Europe.

''This is fantastic! We will be an extraordinary force!'' Mr Grillo said on Monday in a phone interview on his website, warning mainstream politicians they would ''only last a few more months''.

''We'll have 110 people in Parliament and we'll be millions outside,'' said the campaigner, who has packed city squares across Italy with his rallies.

Supporters of the party celebrated the early poll results.

In Mr Grillo's home town of Genoa in north-west Italy on Monday, the beer flowed at a local bar where candidates and activists cheered election tallies.

Dozens of mostly young candidates - some close to the minimum age of 25 and many with little or no political experience - are set to enter Parliament for the first time as Italians fed up with austerity and corruption flocked to their ranks.

However, the euphoria was not shared by across the country or across borders. European capitals fear the lack of a clear winner in Italy could bring fresh instability to the eurozone's third-largest economy after Germany and France and plunge it back into the debt crisis storm.

''A stalemate between the two houses of Parliament would add a noisy element of instability to the political mix, including possibly new elections eventually,'' analysts at German bank Berenberg said in a note to investors.

Some Democratic Party officials suggested fresh elections might have to be held within a few months after a reform of Italy's complex electoral laws. Others said some form of agreement could be found with the anti-austerity Five Star Movement. Political analysts suggested a possible return to the grand coalition agreement between right and left seen under Mr Monti over the past 18 months.